DEALBOOK; S.E.C. Proposes Allowing Hedge Funds to Advertise

By AZAM AHMED

Published: August 30, 2012

Securities and Exchange Commission on Wednesday proposed rules that would remove a longtime prohibition against general solicitation by hedge funds, a huge change for an industry that has ballooned in size and influence in recent decades.">

The tight-lipped world of hedge funds might soon be able to speak more freely.

The Securities and Exchange Commission on Wednesday proposed rules that would remove a longtime prohibition against general solicitation by hedge funds, a huge change for an industry that has ballooned in size and influence in recent decades.

Unlike their mutual fund brethren, hedge funds have long been barred from advertising in public forums like newspapers or television. Releasing information as basic as performance and assets has been prohibited, the idea being that such complicated and risky investment opportunities should be promoted only to those deemed financially fit. That means at least $1 million in liquid assets, or a $200,000 annual income for an individual or $300,000 for a couple. But under the new rules, hedge funds may be able to rent billboards, buy full-page advertisements in newspapers or have Web sites that offer the public a real look inside their operations and performance, as opposed to the password-protected sites most operate today. The proposal - which was mandated by a new law, the Jump-Start Our Business Start-Ups Act, also called the JOBS Act - could go a long way toward demystifying and increasing understanding of hedge funds, which are often accused of being highly secretive.

But critics fear that loosening restrictions could also leave some investors open to fraud if unscrupulous money managers are allowed to appeal to the least sophisticated among them.

It is not clear yet whether the agency will ultimately restrict certain types of advertising. Some worry that the lack of such curbs would be a shortcoming that could allow misleading ads aimed at vulnerable investors.

"There are no substantial proposals to address this increased vulnerability," Luis A. Aguilar, an S.E.C. commissioner, said during a hearing where the rules were discussed Wednesday.

Hedge funds are likely to be divided when it comes to the new freedom. The largest, best-known funds already have sizable asset bases and gold-plated client rosters of pensions and endowments. These funds have little incentive to market more widely. Small and midsize funds, however, could find the ability to advertise and solicit clients directly useful tools in the highly competitive industry.

"For a start-up, it's difficult to differentiate yourself because your track record is short," said Adam Guren, whose Hunting Hill Global Capital opened in February with money from friends and relatives. "Advertising would allow us to differentiate ourselves, speak to the potential investors directly about why we're better than our competitors."

Even seasoned managers say that easing the restrictions would lessen the regulatory headache. Under the current regulations, it is difficult for a hedge fund to market directly to investors if they do not already have a relationship with them. They typically need an introduction.

"We would give money to local charities, and people would say, 'We'll put your name up as a sponsor,' but technically I can't do that," said Howard Fischer, founder of Basso Capital Management, which manages about $500 million. Under the proposal, he said, that would be permitted.

Mr. Fischer said advertising could be tricky. A sophisticated shop would not want to send mass mailings, he said. "Would I take an advertisement out in the Hamptons magazine? Maybe," he mused. "But the freedom to do so and lose those restrictions, it's a terrific opportunity."

More than 10,000 hedge funds are registered worldwide, and a large majority are small and anonymous. One worry is that by opening the floodgates of advertising, the less scrupulous among them could prey on individuals who barely meet the accredited investor threshold.

"There is some concern that there are fraudsters out there who want to play fast and loose with the truth," said David Lopez, a partner at the law firm Cleary Gottlieb Steen & Hamilton. "You worry that the least sophisticated within this universe of accredited investors may be approached with investments that don't suit them."

The proposal will take months to wind through the regulatory process before it is complete.

This is a more complete version of the story than the one that appeared in print.

Securities and Exchange Commission on Wednesday proposed rules that would remove a longtime prohibition against general solicitation by hedge funds, a huge change for an industry that has ballooned in size and influence in recent decades.">